Saturday, December 4, 2010

Laundry lessons - a first follow up

The subject of income distribution is taboo in the USA. On my blog readers noted a simple comparison of the price of laundry in London and New York will do to prove the point. However when reposted on Business Insider (with a more inflammatory header) the hostile-reactometer went off-the scale.

And it did that even though I was careful to point out some of the many benefits of a wide income distribution. There are benefits of non-strict labor laws which make certain businesses possible in America that are very difficult in Europe or Australia.

We have a friend who has a massively cyclic business. (The business involves capital equipment for the construction industry.) They pay their staff very well. (Many receive $100 per hour though most receive far less.) However their staff numbers shrink by 80 plus percent whenever business turns down (regularly enough) and rise by 500 percent when business turns up. The volatility in the business is shared with the staff rather than being absorbed entirely by the owner.

In extrema this business could not exist in (say) France because no business owner could (or would) absorb this volatility themselves. The owner openly says he does not know how people do business in France. Sharing the pain works.

This applies across the whole labor market - the highly flexible working conditions of America are a strength of American business even though at times they result in amazingly large income variability and some very low wages.

Still - and carefully thinking about it - I am not sure what the real cause of low-end wages is.

Many readers thought (logically enough) that immigration levels drove bottom-end wages - after all the women washing my clothes were Chinese and the nannies were largely Hispanic. Some on Business Insider thought me an idiot for not just accepting that. (Australia is - they observed - becoming more closed to immigration.)

I am not so sure.

The US population is 307 million and it grows about 1 million per annum - most of which is driven by immigration - some of it illegal.

Australia has a population of 21.9 million - and the immigration rate has been over 200 thousand people per annum of late. (Its about to drop for political reasons.) The population growth rate in Australia is three times the USA - almost entirely driven by immigration including a lot of immigration of people who would expect to earn below average wages.

In Australia there are more immigrants to do my laundry per head of population than in the USA.

And yet bottom end wages have never been quite as pressured as in the USA - and frankly - I do not understand why.

This is interesting in the case of Australia but truly important for Europe. Europe opened itself to massive internal immigration from poor countries and did not have a collapse in the bottom end wage structure.

The GDP per capita in Bulgaria is under $7000 USD per annum. Bulgaria is poorer than Mexico on that measure. And the border is open. Romania is similar (with a larger population). And sure the low wage workers who clean my hotel room in London are likely to be Bulgarian or Romanian but - whatever - they haven’t managed to drive down the price of laundry.

And that I do not quite understand. It is making writing the European follow up post difficult.

40 comments:

a student
said...

"...including a lot of immigration of people who would expect to earn below average wages."

Are you sure? Isn't migration into Australia is heavily tilted toward skilled migration? My understanding is that in the US, there is a much larger proportion of migration based on family reunion, and of course illegal migration.

I really think that in this context you can't underestimate the impact of "social norms" such as conception of fairness. After all, you don't need to look to Europe or Australia, the pattern of income distribution you are writing about is a fairly recent feature of the US market - it wasn't that way thirty years ago.

Personally one area I'd look at is the disappearance of "social sanction" from American society. It used to matter HOW someone got rich - today, status comes from money exclusively, and once we are in that environment, getting money (and so status) starts to dominate all other considerations.

maybe it has to do with the something to do with the other components of what makes a reasonable profit for laundry owners - e.g., prices of goods or more importantly the ability to have a better standard of living with less money?

I've learned to ignore the comments on BusinessInsider. When it initially launched the comments were of high quality, along the lines of comments to Fred Wilson's blog (avc.com). Now most comments appear to be written by people who watch Fox News 24 hours a day or listen to Rush Limbaugh ad nauseum.

In Australia, most immigrants (AFAIK) enter through a points system which rewards prior education, fluency in English, professional licenses, work experience, etc.

In the U.S., the workers at Chinese laundromats and strawberry farms likely had no formal education. And due to a somewhat permeable border (U.S.-Mexico) there is a big supply of "surplus uneducated labor" which keeps downward pressure on jobs that don't need a lot of skills (especially English communication abilities).

One key to remember is that the U.S. has been absorbing low-English, low-education illegal immigrants at rates of a bit over a million in peak years, and maybe 300k in down years, for decades. Add ~1m legal migrants a year, and assume 50% of those are low-skilled (again, this has been ongoing for decades). By contrast, Poland joined the EU in 2004 and Bulgaria/Romania in 2007.

Those are indeed hard questions you are asking. I think the conundrum of where the cheap labor went is similar to the question where the newly printed money is going in a credit boom society. You can't spot it until it goes pop.

I think it is fair to say that the cheap labor did enter the richer european economies. Only in ways that are a little different from the US. Why not laundry? Because if everyone is accustomed to expensive laundry services and has adapted to that that won't turn around in a couple of years, there just is no market.

But there are lots of other pockets where it went. Let me give you a few hints: - industrial cleaning- transport- building- publicity distribution- manual agriculture- ...

Wow, I was completely wrong. I just looked at the OECD's "A Profile of Immigrant Populations in the 21st Century" and they have statistics on immigrants by education. The US and Australia are not that different:

Proportion US AusPrimary 39% 41%Secondary 35% 33%Tertiary 26% 26%

I spent the first 25 years of my life in Australia, and the subsequent 10 in the US, and this amazes me.

P.S. I missed the end part of your post about "...sure the low wage workers who clean my hotel room in London are likely to be Bulgarian or Romanian but - whatever - they haven’t managed to drive down the price of laundry."

In this respect I think you may find that the issue is "access". The actual workers may bot be paid that much more than those who do similar work in the US, but because opening a "business" in London is much harder than in the US, the intermediary you get to deal with gets to pocket a lot more of the surplus.

SB

And that I do not quite understand. It is making writing the European follow up post difficult

"because opening a "business" in London is much harder than in the US, the intermediary you get to deal with gets to pocket a lot more of the surplus."

I don't understand this. I opened a business in London and it was trivially easy. You can form a company online for £25 and be in operation later that day.

London has a large and diverse property market. Getting bank finance for a new business with no assets and limited liability is almost impossible, although I did get an overdraft immediately. I doubt this is unique to London though.

I just returned from a trip to Europe and my observations are that unionized workers have job security while the non-unionized workers serve at the whims of their employers.

Coming into Brussels by train, I saw blocks and blocks of houses where the front of the houses had individual rooms that had windows from floor to ceilings with women wearing only braw and undines setting on chairs with people looking in on them; much like a zoo.

I was told that these women were registered prostitutes and had all the benefits of unionized workers.

In America the immigrate has come into the land of “equal opportunity” where some become very successful, income wise, while others are stuck in low income jobs.

With our high government debt and declining competitiveness our incomes will not keep up with inflation with more of our income being allocated to fund tax support activities.

I suspect that in the future people will see America as the land of low wages and high cost.

The majority of less than 2 years of university or equivalent type immigrants who come to the US (legally or illegally) take low end (service sector) jobs because those are the only ones available to persons with less than 2 years of university whether they're immigrants or 4th generation.

High end jobs in the US for skilled labor types have been contracting for over a decade. Thanks to China's voracious appetite for raw materials and its proximity to Australia, high end skilled labor job demand has expanded in Australia.

Try getting your laundry done in Vancouver, BC or Calgary, Alberta. Costlier than Brooklyn and not much less than in Sydney. That's thanks to the natural resources export boom in those provinces.

So were the "capitalist" piglets who frequent the Business Insider blog calling you a socialist, Mr. Hempton? I don't have much time to read their (BI's) drivel.

Interesting post! One insight that might be worth pursuing to explain this phenomena could be to compare the amount of *free time* away from work activities between Australians and Americans. I suspect you would find the Americans more obsessed with their work and the Australians more willing to use their higher amount of free time to take care of their own laundry. Where I used to work, we had an engineering group in Scotland that was pretty much out of the loop after Friday at 3pm, while our American engineers were corresponding with email on Saturday evenings, etc.

"And sure the low wage workers who clean my hotel room in London are likely to be Bulgarian or Romanian but - whatever - they haven’t managed to drive down the price of laundry."

These are new countries with very unequal internal income distribution. Things change there all the time. But my first intuition was that these immigrants are like the workers in your friends massively cyclical business. In good times they moved to western Europe and were paid like the locals (e.g. very well compared to BG/RO). Now that times are bad they are out of a job and either idle or back home. The volatility is not absorbed by the host country.

I have friends who run small businesses in France and Croatia. I run one in New York. There is a much larger business black market in those countries that allow the kinds of flexibility there inherent to the American system. This requires business people there to be much more "involved" with their local politicians and to take on political risk in a small business. It sucks in exactly the same way as the "pay to play" political economy of New Jersey before they started carting politicians off to jail there.

The flexibility of the US system served the system well until the Friedmanites redefined half of unemployment out of existence. Once labor lost its bargaining power, and don't get me wrong I HATE UNIONS, Im talking about the atomic worker looking for a better job, wages went flat relative to profits.

From WW2 to about 1982 labor and capital split the productivity gains of the aggregate economy. Since then all gains have gone to capital. Nice work if you can get it.

I think this is a great example of searching for an explanation in pure economics when the real answer lies more in the real world.

While I am sure that prevailing wages and income equality, culture, and immigration policy are part of the explanation, having lived in New York, Dublin, and London, I can make a more straight-forward observation:

In American cities, most apartments do not have their own laundry machines in the unit. American appliances are behemoths (although that is changing). Only in the past few years have we begun to really see "stacked" washer / dryers and smaller units similar to what I saw in Europe a decade ago. When I lived there, not all units had such machines, but it was at least common. In New York and other American cities, it is still rather rare, because the US appliance market has focused on the SUVs of washing machines.

Many buildings have shared facilities, and there are many coin-op laundromats, but almost all of these are pay-per-use, and comparatively it makes sending your laundry out much more attractive. The market for "send-out" laundry service is so big, in fact, that it drives competition and their goal is to get the price down to be comparable with doing it yourself using quarters.

Because the market is big it leads to individual storefronts on every corner sending their laundry to the same giant warehouse launderers in Queens and Brooklyn. A big market such as that is an easy one for new migrants to slide into, at whatever wage is being offered. So, wages stay low (also influenced by culture, income inequality, and the like).

Even though there are economic bits to this explanation, if you rewind to 1980 and sell different appliances in the US, I'd be willing to be that the outcome would be significantly different. More an more new apartments here have the new, small laundry machines where none would have had anything before. It's a combination of real estate pricing and GE and Kenmore's marketing decisions.

Here's another 2 cents (as a BG/RO native living in NYC after having lived in Minneapolis/St Paul)- NYC is expensive in some ways (rent, taxes of various kinds) and really inexpensive in other ways (transport, services). Laundry belongs to that last group. So do hair cuts, shoe repair, street food, etc. Look for family-run immigrant businesses for low prices (which is why haircuts and laundry were costing me more in Mpls: somehow they ended up with low enterprise migrants absolutely refusing to interact with the system, incl. cashiers refusing to ring up pork). On the other hand, I recently saw beef dishes in an Indian restaurant in another major immigration center city. The costs related to the low skilled migration are socialized, of course (bilingual education, use of emergency rooms as primary care, underreporting of crime, ethnic-line scams, uninsured/uninsurable drivers, etc.) - BG/RO vs. Mex is not very good comp. One of the good legacies of the commies there is that there is a very high unencumbered home ownership percentage (north of 90%) + being, more or less, a first class citizen. A cleaning job in the UK would have to pay rent, travel to and from the home country, higher taxes/cost of living + savings. All of a sudden, BG/RO life is not that bad even if you have to live in the concrete box you inherited from your grandmother somewhere on the outskirts of 3rd rate EU capitals.

You could have cause and effect the wrong way around possibly...a cheap cost of living attracts the type of worker that will work for minimum wage? Similarly, the cost of living as you pointed out in your first post in Australia is a lot higher than the US, so the continuing prevalence of lower than minimum wage workers continues? This would also explain the same situation in Europe...even though borders are open, workers just can't flood the more affluent markets because the cost of living is already too high. It becomes a "chicken and egg" problem...if you want cheap workers, you already need a cheap cost of living. And there are not many parts of the developed world that are as cheap to live in as the US. HK is another example of this...workers that don't earn much working on the island can live in Kowloon quite cheaply and have a decent life. This wouldn't be possible in Sydney.

I'm Australian and I've lived in Europe and my wife is American and I've spent a fair bit of time there too. I've noticed similar distribution of wealth effects before too, and how expensive cheap things are, and range of prices paid for housing and labour in various countries.

The order of how expensive cheap things are in various countries seems to be something like as follows: 1. Scandinavia. 2. UK, Germany, Australia, Canada, etc. 3. US. 4. South Africa, Philipines, etc.and most other countires I haven't spent much time in and can't say much about.

The effects show up in many areas of life, inlcuding within workplaces. Professional people in the US are very well paid, non-professional people are very poorly paid. I don't believe that lawyers (for example) in the US are of more value in their society than lawyers in Australia. The same for doctors or engineers.

I've come to the conclusion that market explanations for distributions of wealth are only periferal, and social effects dominate.

The starkest contrast comes from the extremes. For example, there are stacks of people that would apply for a $10,000,000 per year job as a director of a company, and probably several percent of those could actually do a job better than the people who do do the jobs. But these jobs are filled by other directors choosing "the right sort of people" - i.e. people they know in an almost purely social manner with little input from any market.

At the bottom of the scale, I hear managers of small businesses complaining how their employees don't stick around, and "how can there be any unemployment when I've got two unfilled positions". I've suggested paying more, and the reply is something like "they are only sweeping the floor and picking up off-cuts". The market is saying that's a boring job and no one wants to do it, so it has to pay more, but Mr. business man thinks anyone could do the job so it must get paid at the bottom rate, and he'd be getting ripped off if he paid more, or perhaps his machininsts might start wanting to sweep to get a pay rise.

Expectations from both employees and employers dominate, and the market makes adjustments around those expectations.

For example, when a particular type of person is expensive, companies find different ways to do things. E.g. apply more machines when cheap people are expensive, or apply more managers and less trained staff when highly trained people are expensive. There are all sorts of ways to organise things (which is what you've been observing), and these ways of organising seem to be where the adjustment happens rather than variation in wages of different types of people, which seems to be remarkably slow to adjust.

As a Brit, living in the UK, I see the benefits of that low-cost labour immigration all around me. My Slovakian au pair, for instance, earns somewhere between 1/3 and 1/2 of what a qualified British nanny expects to earn. I get more hours, more flexible labour, an incredibly willing worker who is now essentially part of the family. In short, a much better deal from my point of view and I'd never hire an English girl. To concerns that I am exploiting her, all I can say is that she also earns what I understand is roughly double the average wage in her home country, is studying in her spare time here, saves almost everything she earns, appears very happy and has been with us for three years and wants to stay more. Everyone I know (I live outside London) who has live-in/ full-time help also employs Eastern Europeans and their experience is almost universally good.

That, I think, addresses one part of the question: if you want to employ someone full time you can do so at/ around minimum wage very easily, but it is particularly easy to do so if you employ an immigrant. From the immigrant's point of view the job is much better paid than anything available at home. It is also typically a job taken with a broader objective in mind - ie the broader benefits of living in the UK, etc. There is also the softer point that as an employer, I probably feel less bad about paying that immigrant close to minimum wage because I know they think the money is good. I might find it harder to pay my UK cleaner the same hourly rate because the disparity between us would be more apparent.

One other big issue in the UK (and maybe not in the UK) is employment taxes. In the UK this takes the form of employer's national insurance contributions. These add very significantly to wage costs from the employer's point of view and therefore put downward pressure on wages. In the case of my au pair, though, I don't mind paying NI in full as her wages are pretty low. So I declare her to the taxman and pay her NI contributions. The implication for her of this action is that she also has to pay income tax as she is now on the radar screen. Obviously I then have to pay her enough to make the net take-home pay attractive, but it all works out as I said in the first paragraph.

Interesting stuff. Check out Timothy Noah's recent deep dive into income inequality in the US over the last 100 years on Slate. He addresses many of the issues being discussed in the blog and comments (immigration, tax policy, meltdown of the nuclear family, education and many more).

I lived LA, NY and in Europe. The mass immigration and the high fertility of 50 millions of mostly poor unskilled third world peopole to the USA (and the offshoring of other 10 millions middle class-bread winner jobs) explains most of the "mistery" of low income jobs in America.

Mr Hempton immigration to Australia is different ! --...People born in the UK make up the largest migrant group with 1.2 million people...Other major groups come from New Zealand (495,000), China (314,100), India (239,000) and Italy (222,000).http://www.livingin-australia.com/record-immigrant-numbers-australia/

You do not have (using a 14 : 1 ratio between USA and Australia population) 14 million British and 2 millions Italians immigrating to the USA. You have american indios from Guatemala, Mexico, Honduras, Peru, blacks from the Caribbean and Africa, pakistani, philippinos...

the USA has more income inequality because is more and more similar to Brasil or Mexico. And because at the top has an elite that does not anymore idenfities itself with the "Flyng Over Country" and the "white trash". The poor are of different races like in Brasil and also (sorry to mention it) the NY or LA elite is mostly jewish and sees working class folks as belonging to another group

Rather than rely on anonymous blog-posters and intellectually dishonest 'think tanks' appraisal of household income over time, that ignore the shrinkage in US household size, it is MUCH easier to actually look at the data directly - something they, for some reason, don't like to do or to analyze...I wonder why:

http://www.bea.gov/national/nipaweb/index.asp

To me -- and I think this is something everyone would agree on; Income growth should be defined by what we, as individuals, take home after tax and after inflation.

Real Incomes:Since 1970, they are up 118% in real terms, as of Q2 2009.

Since 1974, they are up 95% in real terms.

Since 1979 they are up 72%.1979: 18.8k2009: 32.7k

Since 1984 they are up 58%, all in real terms. The most recent data is the same.

The average US household size has dropped half-a-person in 40 years, according to the Census Bureau. Since WW1 we've gone from 4.5 to 3.5 to 3 to just over 2.5 currently.

In fact, the ‘progressive’ efforts to retard understanding on this topic by introducing apples-to-oranges comparisons of the growth in income of a millionaire in 1980 to his income today, to an immigrant that just entered this country in 2005 or 2007 shows how dishonest and utterly useless such studies are if they are not longitudinal.

Much of the gain at the higher end is due to the additional member of the household entering the workforce, whereas most of those in the lowest quintile are solo, non-working heads of household, and being unable to clone themselves are thus incapable of doubling income so easily.

The median number of workers in the two highest quintiles is TWO workers, according to the 2006 Survey of US Census Bureau. They start quintiles at $55k and $88k respectively, or $27k and $44k per median worker. OMG Rich!!The median number of workers in the middle and second lowest quintile is ONE worker. The second lowest quintile earns ~$18k per median worker.The lowest quintile has a median # of workers of ZERO. 60% of them are single-person households, unlike the 90% of top quintile households that contain multiple people, 89% of whom are married families.

Leftists always refuse to make an apples-to-apples comparison on the topic, disregarding the longitudinal studies which are widely available. [SIPP data]

Otherwise, if 13mm immigrants come to the US as they have in the past years, starting virtually all at the bottom of the income deciles, you've got a significantly lower-earning population on average/median, even if all existing workers got a nice raise.

I think it's difficult to account for some features of wealth and income from sources like the Census but also from tax returns -- which doesn't include tax sheltered income or transfer payments. Also, as Buffett among others likes to point out, the distribution of income by percentile is only one component of the distribution of welfare over time -- mobility within the distribution, for example, is another. Obviously high income concentrations with a lot of mobility feels a lot less unequal...

Here is a link to a very recent paper that coincidentally does connect the different ideas in this thread. The author argues that the rise in inequality has been greatly exaggerated; separately, he happens to say that labor's overall share of income is unchanged in the last 25 years. It caught my attention because it was written by someone who has written about growing inequality as problematic, so may be less likely to come with an agenda.http://www.nber.org/papers/w15351

Per-capita, Real DPI since 1979 is up 72%+ in the US:1979: 18.8k2009: 32.7k

Since 1984 they are up 58%, all in real terms. Etc.

The average household size has dropped half-a-person in 40 years, according to the Census Bureau. Since WW1 we've gone from 4.5 to 3.5 to 3 to just over 2.5 currently.

No white paper by liberal economists or bloggers can make stubborn fact that go away.

In fact, their efforts to retard understanding on this topic by introducing apples-to-oranges comparisons of the growth in income of a millionaire in 1980 to his income today, to an immigrant that just entered this country in 2005 or 2007 shows how dishonest and utterly useless such studies are if they are not longitudinal.

Also, any cursory examination will show that much of the gain at the higher end is due to the additional member of the household entering the workforce, whereas most of those in the lowest quintile are solo, non-working heads of household, and being unable to clone themselves are thus incapable of doubling income so easily.

The median number of workers in the two highest quintiles is TWO workers, according to the 2006 Survey of US Census Bureau. They start quintiles at $55k and $88k respectively, or $27k and $44k per median worker. Rich!!

The median number of workers in the middle and second lowest quintile is ONE worker. The second lowest quintile earns ~$18k per median worker.

The lowest quintile has a median # of workers of ZERO. 60% of them are single-person households, unlike the 90% of top quintile households that contain multiple people, 89% of whom are married families.

I can't comment on Australia/US but I suspect that the Scandinavia/US differential is due to VAT rate of 25% for most goods and services.

With tax rates that high, doing your own ironing becomes a non-negligible source of imputed income for much of the population. As soon as the middle class doesn't want ironing, economies of scale disappear and **everyone** does their own ironing.

I think that the rate of unionization has a lot to do with the international disparities. The US has remarkable low rates of unionization. The wages of union employees has a strong effect on wages in general. See International Patterns of Union Membership at http://www.dartmouth.edu/~blnchflr/papers/bjir_600.pdf for details.

Isn't the reason identified by Michael Hudson who explains that higher land taxes keeps housing prices down. Think Texas. This means that poor people can afford to work for minimum wage in Texas. House prices in Canada and Australia are too high made worse by tight zoning. Hence the long commutes and the scarcity of those willing to work for low wages.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.